Sterling started the week very much on the backfoot following comments from two Bank of England officials over the weekend suggesting the committee would consider a rate cut if UK economic data continued to indicate a downturn in the underlying economy. Data released yesterday reaffirmed their comments, with monthly GDP figures confirming the UK economy shrank in November following a sharp fall in consumer spending as well as a slowdown in the manufacturing sector. Analysts have suggested the decline may be attributed to heightened uncertainty surrounding the December election, although this speculation does little to support a -0.3% decline in GDP and -1.7% decline in manufacturing. The underwhelming data combined with the negative rhetoric saw the probability of a January rate cut from the Bank of England rise from 20% to 47% yesterday, also coupled with an aggressive fall in Sterling. The last 48 hours has seen the British Pound fall over 1% versus the US Dollar and 1.2% against the Euro.
The market will now focus on the UK inflation data released tomorrow and the UK retail sales which is due to hit the wires on Friday. The BoE tends to focus on growth and inflation when deciding on the path of intertest rates. The case for a rate cut is growing as inflation currently is below the threshold target for the central bank; the target is 2%. In the meantime, retail sales make up a large proportion of the GDP numbers. Weak numbers here could see the probability of a rate cut increase.
US Inflation Expected to Rise
US annualised inflation to rise to 2.3% from 2.1%, but for the core measure to hold steady at 2.3%. This is likely to be seen as healthy as Fed official continue to monitor the economy for decisions on future policy.